It’s Impossible for the Fed to Shrink Its Balance Sheet, Says Peter Schiff
As anticipated from their meeting yesterday, the Federal Reserve has yet again decided to keep rates steady. The speculation has now moved to the end of this year when, many are predicting, that the Fed would finally go for a rate hike. I have long held the view that the rate hike is inevitable but it won’t happen this year. Peter Schiff is out with the same view. In an interview yesterday, here’s what he had to say on Fed’s next monetary policy move:
“Everybody is still, you know, brainwashed. They believe the Fed propaganda. The Fed has been talking about how great the recovery is, and how it’s getting ready to raise interest rates. None of that is true. There is no recovery, thanks to the Fed. All there is, is a gigantic bubble that has prevented a recovery from taking place. The only reason the Fed is pretending it’s going to raise rates is so it can pretend that the economy is strong enough to withstand that. Basically, the Fed can’t do that.[…] This is not a healthy recovery, but a bubble. That, there is no endgame. There is no exit strategy. That, the Federal Reserve has no ability whatsoever to raise rates. It is impossible for the Fed to shrink its balance sheet. The balance sheet is going to go to the sky. It’s going to go to $10.0 trillion maybe by the end of this decade. Right now, it’s $4.5 trillion. When people perceive that reality, they are going to run from the dollar. The only reason that people have been buying dollars is because they believe the Fed, they thought the Fed is going to raise rates.”
We’ve been hearing in all of the Federal Open Market Committee (FOMC) meetings lately that the rate hike would depend more or less on inflation and unemployment numbers. But Schiff believes that even if inflation and unemployment go up, the Fed won’t be able to raise rates.
“[…] the Federal Reserve is going to do nothing. Even if inflation as measured by the CPI goes to 2.5%, 3%, 4%, the Federal Reserve would do nothing. Just like when unemployment went below 6.5%, they didn’t lift rates. When inflation goes above 2% they won’t lift rates either. It doesn’t matter how high inflation goes, they can’t raise rates without bringing in a financial crisis worse than the one we had in 2008.
[…] All the data is consistent with recession, not expansion. If the Fed were to raise rates, this would be the first time they’d actually raise rates into a slowing economy.”
This brings us to the next likely rate hike period in March of 2016. Schiff is of the view that the economy is in a much worse shape than it was in March of 2015. He believes that if the Fed didn’t raise rates earlier this year, it wouldn’t make sense to raise rates even in early 2016, when the economy will be at the brink of collapsing.
When asked if one should invest in the dollar or gold in the coming days, the all-time famous gold bug picked gold over the dollar. You can watch the complete interview here.
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